Supertankers & speedboats – how to succeed with internal start-ups

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To use a well-worn analogy, large corporations are like super-tankers. They have great momentum, but move slowly & struggle to change course. As sector after sector is disrupted by digital, incumbent enterprises are exploring ways to become more agile. Many firms have recognised that it’s tough (and sometimes undesirable) to turn the tanker faster. Instead they are opting to augment their core business with ‘internal start-ups’ that, like speedboats, move at pace and can turn on a dime. Such start-ups can be an effective way to experiment with new business models and to build a new culture. But, in common with all start-ups, they have a high failure rate. Based on observing a few success stories (client confidentiality prevents from naming them) here are a few thoughts on what’s required for a successful internal start-up:

1. Charted course. Speedboats may be nimble, but they still need a destination and a course. Corporates typically set up internal start-ups (ISUs) to explore innovative new propositions or business models, such as digital-only businesses. But far too often, the destination isn’t sufficiently clear. Winning ISUs have razor-sharp objectives in both financial (e.g., revenue) and operational (e.g., new customers) terms.

2. Autonomy. A speedboat that is tight-roped to super-tanker isn’t going very far. Internal start-ups (ISUs) also need a level of autonomy to succeed. ISUs too often rely on the broader corporation for basic processes (e.g., customer service, HR), in turn slowing them down. Successful ISUs are fully-fledged autonomous businesses. They have a full P&L, and control over assets (e.g. customers, products, sites) transferred over from the parent business. They rely on the parent only for services (e.g., supply chain) that can’t easily be replicated.

3. Source of Power. ISUs often suffer from covert competition from the parent business. For example, newly established digitally-based businesses often compete with ‘legacy’ businesses based on more traditional channels. Winning ISUs have sufficient sponsorship, typically at exco level, to fight for the required resources and autonomy.

4. Reliable supply chain. Just as speed-boats require regular re-supply, ISUs are reliant on the parent company for funding, people and services. Winning ISUs ensure that regular and reliable re-supply is in place, often backed by clear SLAs vs. the providing parent.

5. Effective controls. ISUs are by their nature risky. Good corporate governance demands sufficient oversight of the ISU and clear accountability for its leaders. But strong controls also help the ISU , for example by ensuring the parent company is making good on its re-supply promises.

6. Hand-picked crew. To operate as a start-up, ISUs typically need a different culture from the parent, a culture that values risk-taking and experimentation over stewardship and predictability. A new culture can be most effectively seeded by hand-picking a group of leaders who embody it, and combining them with external resources (hires, contractors or consultants) who bring a new perspective and way of working.

In summary, internal start-ups can be a great way to accelerate innovation and build a new culture. But they require careful design to ensure they don’t go the way of most external start-ups.